JIM O'NEILL: The Political Nightmare Unfolding In Italy Has Got Me Excited

The recent chaotic election in Italy has brought political
uncertainty back to the Eurozone, and it may have even
contributed to the recent spike in volatility in the global
financial markets.

However, Goldman
Sachs economist Jim O'Neill finds all of this very exciting.
While he acknowledges that Italian political gridlock is a
nightmare scenario for others in Europe, he believes that change
may finally be coming to Italy, which has seen its GDP
effectively go nowhere for years.

In his latest
Viewpoints note, he lists offers three observations about the
Italian election:

I will be attending a well-known financial forum on the shores of
Lake Como late next week, and in that sense, post the uncertain
outcome delivered by the Italian electorate, it will be
interesting to hear the debate at the forum (although I will be
fresh from much bigger excitement at Old Trafford earlier in the
week). For now, I have three observations about the Italian
election outcome. Firstly, perhaps somewhat oddly, I find the
outcome quite exciting because it seems to me for a country who’s
GDP has basically not changed since EMU started in 1999,
something big needs to change. Maybe this election outcome and
the peculiar mass appeal of the Five Star movement could signal
the start of something new? Secondly, for the established elite
of Italy and, crucially, the other ‘power centres’ of Europe, in
particular Berlin and Frankfurt, these results are pretty close
to a nightmare. Indeed, it questions many aspects of the status
quo, including the widespread view in such circles that debt
reduction for the sake of debt reduction is not only a worthy
cause, but one that is necessary to attract policy support. If
such a consensus were open to change, they should question this
belief but I suspect it won’t come quickly or easily. Thirdly and
linked to this, in my view, Italy’s real problem is the absence
of economic growth, which has caused debt to rise, and not the
same problems as some other problematic Euro-zone countries.
Italy’s cyclically-adjusted fiscal position is actually in modest
surplus (see table below), which is better than virtually all
other developed countries. I believe that tightening fiscal
policy for the sake of it with a vague aim of debt reduction is
not a smart strategy. Italy needs to reform its product and
labour markets, boost nationwide productivity and reform. They
also need German and ECB support in order to stay in the EMU, and
especially now, to stop a potentially fresh escalation of
unnecessary increases in bond yields. In Italy, reform doesn’t
equate to austerity as their voters have just shown.